What is Binary Options Trading?

A Binary Option is a type of option where the trader takes a yes or no position on the price of a financial asset, and the resulting payoff is all or nothing. Because of this characteristic, Binary Options can be easier to understand and trade than traditional options.

Binary Options are cash-settled as European-style options, meaning they can only be exercised on the expiration date. If, at expiration, the options settle in-the-money, the buyer or seller of the options receives a pre-specified dollar amount. Similarly, if the options settle out-of-the-money, the buyer or seller receives nothing. This provides a known upside (gain) or downside (loss) risk assessment. Unlike traditional options, Binary Options provide full payout no matter how far above (or below) the option settles from the strike price.

Despite the term “all or nothing”, depending on the actual trading platform, “nothing” can actually mean “something”. This means that at expiration time the owner of the option may actually get a certain payout amount, even if the option expired “out of the money”.

Despite the term “all or nothing”, depending on the actual trading platform, “nothing” can actually mean “something”. Sometimes the owner of an option that settles out-of-the-money may receive a certain payout amount, even if the option expired “out of the money”.

Very often you may encounter binary options under another name. In the foreign exchange market Binary Options are known under the name of digital options.

Getting started

The best way to start a career in binary trading is to get some practice in with a demo trading account. With a demo account, you can practice trading in real time with almost all brokers. There is no way to duplicate the experience that comes with real trading.

The way it works is pretty easy. With demo trading, you are given a certain amount of fake money to start out with. You can use that money anyway you see fit. The platform you will be using for demo trading is the same platform that you will use when you’re actually trading with real money, so demo trading helps eliminate the learning curve and any mistakes that you might make while figuring out how to use the software.

Demo accounts will differ from broker to broker, and some places do not even offer demo trading.

There is a downfall to using a virtual account, however. Most brokers that have it will only allow you to keep it open for a very short period of time. Some will only allow you to demo trade for 72 hours. This is more than enough time to figure out how to use pretty much all aspects of how the software functions, but if you are brand new to trading, this is hardly enough time to work out an effective trading strategy. If you are new to trading, you will want to give yourself as much time as possible before starting out. Experience is something that you need to accumulate over time.

Binary Options trade types

In 2014, binary options brokers offer a greater range of options on their platform with different characteristics and payouts to suit an individual’s trading style. This also includes 60-second options, option builder, and weekend options.

High-Low (Call/Put): The most popular binary trade is the high-low option, where an individual can bet on whether an underlying asset will finish above (Call) or below (Put) a certain price in a given period of time.

One Touch: The one-touch option pays out when the underlying asset hits a certain price at anytime during the trading period.

Tunnel or Range Option: First of all the trader sets up a high boundary and a low boundary for his trade. If the underlying assets stays within these ranges for the entire trading period (without touching the boundaries) then he wins a pay-out. The tunnel bet is essentially a way for traders to bet on the volatility of the market.

Target: In contrast to a tunnel bet, a target bet pays out in the money when the price hits a specific level determined by the individual. He/she can either set a higher target price if he thinks the market is bullish or a lower target price if the market is bearish.

Step 1: Choose your broker

Binary options brokers provide the route through which binary options traders gain access to the markets. It is not possible to get into the markets directly. Brokers exist to provide a structured manner of participating in the market. They have a clean, automated system of matching buyers and sellers of an asset, and are supposed to hold your funds in trust and send them back to you when you need them. They are also supposed to make sure that you are able to buy or sell at either the prices you have stipulated or something close to that. Compare most reliable and popular brokers here.